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Treaties deemed incompatible with EU law as they are based on nationality

The EU has initiated infringement proceedings against five member states, requesting them to terminate intra-EU bilateral investment treaties between them (intra-EU BITs). BITs are agreements establishing the terms and conditions for private investment by nationals and companies of one state in another one. Intra-EU BITs are agreements between EU countries.

Many intra-EU BITs were agreed in the 1990s, before the EU enlargements of 2004, 2007 and 2013. They were mainly struck between EU members and those that would become the “EU 13”. They aimed to reassure investors that wanted to invest in the future “EU 13” at a time when they might have felt wary about investing in those countries. The BITs were thus aimed at strengthening investor protection, for example, by means of compensation for expropriation and arbitration procedures for the settlement of investment disputes.

The European Commussion deems that, since enlargement, such reassurances should not be necessary, as all EU countries are subject to the same EU rules in the single market, including those on cross-border investments (in particular the freedom of establishment and the free movement of capital). All EU investors also benefit from the same protection thanks to EU rules (for example, non-discrimination on ground of nationality). By contrast, intra-EU BITs confer rights on a bilateral basis to investors from some member states only: in accordance with case law from the European Court of Justice, such discrimination based on nationality is incompatible with EU law.

The Commission has therefore now formally requested Austria, the Netherlands, Romania, Slovakia and Sweden to end the intra-EU BITs between them.

Ireland and Italy have already ended all their intra-EU BITs in 2012 and 2013 respectively.

Jonathan Hill, EU commissioner for financial services, financial stability and capital markets union, said: “Intra-EU bilateral investment treaties are outdated and, as Italy and Ireland have shown by already terminating their intra-EU BITs, no longer necessary in a single market of 28 member states.”

Commenting on the announcement, Dr Wojciech Sadowski, partner at K&L Gates Jamka sp.k, said: “The Commission has long guarded a view that the intra-EU BITs are incompatible with the idea of the single market, as the substantive and procedural guarantees offered by the BITs to investors put them in an arguably better position than the nationals of the member states that are not covered by these treaties. The current action needs to be seen as an important step on the way to impose that view on the member states. This action coincides in time with the ongoing quest for enforcement by Swedish investors of an award rendered against Romania, which the Commission considers to be incompatible with the EU law. Sweden and Romania are included on the list of the member states requested to terminate their BITs.

It is to be expected that similar requests and infringement actions will soon be started by the Commission with respect to some other member states. Even if successful, though, this initiative is unlikely to change the landscape of the intra-EU BIT arbitration within the foreseeable future. This is because many of the intra-EU BIT include clauses that allow the substantive and procedural provisions of those treaties to survive the termination by a defined period of time, including up to 15 years. By that time from now, the worldwide landscape of the international investment law will be very different from its present shape.”